Asian markets took a breather in Tuesday's trading, with most markets ending mildly in the red on profit-taking, ahead of the U.S. Federal Reserve meeting. Only China and Hong Kong bucked the trend.

In Japan, the Nikkei ended a two-day winning streak, closing down 47 points, or 0.26%, at 16,651, while the Topix ended flat, down 0.72 points, at 1607.21. In Korea, last week's run of gains came to a standstill, with the Kospi falling 10.5 points, or 0.5%, to close at 2052.37.

Indian markets, which staged a rally yesterday to a record high, ended in red territory too. The BSE Sensex slid 194 points, or nearly 1%, to 19,783.

"Markets have rallied so much that most companies are already well past their target prices," says Winner Lee, an associate director at BNP Paribas in Hong Kong. "Hedge funds are relatively quiet because they like to buy into volatility."

Previous session gainers saw mild losses on profit-taking as investors sat on the sidelines for most of the market session.

Korean steelmaker Posco ( PKX), which has surged over 12% in the last week, lost 0.3%, to 675,000 won, while Kookmin Bank ( KB) slipped 4.13%, to 74,200 won.

Japanese exporters fared similarly. Sony ( SNE) lost 1.39%, to 5,640 yen, while Canon ( CAJ) shed 1.52%, to 5,800 yen, and Honda fell 0.96%, to 4,200 yen. Nintendo ( NTDOY) bucked the trend however, moving up 1.12%, to 71,700 yen after the company said that it would bring the Wii to China and South Korea in the new year.

Japanese banks such as Mitsubishi UFJ ( MTU), which gained 1.83%, to 1,111 yen, were stronger on economic data. Unemployment in Japan fell to 4% in September, up from August's 3.8%, and its highest level since March 2007. That increases the likelihood of the Bank of Japan holding off on a rate hike until the early 2008.

In addition, the Japanese small business confidence index eased to 47.8 in October, from 49.1 a month earlier.

The yen was trading slightly weaker vs. the dollar on the data, at 114.49 vs. yesterday's 114.23.

In China, shares continued to surge, as the Shanghai Composite Index ended the day up 149 points, or 2.6%, at 5,897. The Hang Seng ended in record territory for the third day running, climbing 51 points, or 0.16%, to 31,638 points.

In Hong Kong, investors are awaiting the debut of Alibaba.com, which raised $1.5 billion, valuing the company at $8.8 billion and making it the second-largest IPO of a tech company after Google ( GOOG).

Most of the big momentum stocks lost on profit-taking however, with the market being held by select financials and commodity stocks.

China Mobile ( CHL) fell 0.57%, to HK$158, while China Netcom ( CN) slipped 2.25%, to HK$23.90.

PetroChina ( PTR) was up marginally, 0.71%, to HK$19.76, while Aluminum Corp. of China ( ACH) lost 0.87%, to HK$22.75 in Hong Kong, but gained 4% in Shanghai, to 50 yuan on higher commodity prices.

China Life Insurance ( LFC) shares lost 0.1% in Hong Kong, to HK$51.95, faring similarly in Shanghai, down 0.08%, to 75 yuan.

For the moment, Lee recommends sticking with property stocks such as Cheung Kong Holdings ( CHEUY) and petroleum stocks, since she says most shares are overvalued.

"Stocks have been overbought and most of the valuations are at big premiums to expectations now," says Paribas' Lee. "There needs to be a correction in the volatility of the market, and we need to see more consolidation if the Chinese market is to stay healthier."

Daniel M. Harrison is a business journalist specialising in European and emerging markets, in particular Asia. He has an MBA from BI, Norway and a blog at www.theglobalperspective.biz. He lives in New York.

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